Score is tied on markups of mortgage settlement fees

August 21, 2005|By Kenneth R. Harney, Washington Post Writers Group

WASHINGTON — A new federal court ruling focuses attention on a question that potentially touches millions of American consumers: When you get a home mortgage, should your lender be free to "mark up" your fees without limit?

When your lender spent $3 checking your credit electronically, should you have to pay a $65 credit check line item on your settlement sheet?

When your mortgage company pays $25 for an electronic valuation of the house you're buying, should it be permitted to charge you $500 for your "appraisal" at closing?

In a nutshell, does federal law allow a lender -- or any other service provider -- to lard on all sorts of extra charges to your settlement costs without performing additional services to justify the markup?

HUD, the agency charged with overseeing the federal law in this area, says that all markups are illegal absent extra services. But lenders, title agencies and other industry groups have fought HUD's ban, arguing that it goes beyond the intent of the Real Estate Settlement Procedures Act, or RESPA.

Earlier this month, a federal appellate court in Philadelphia sided with HUD, and became the third court to do so. Normally that would put the issue to rest, but not this hot potato. That's because three other federal appellate courts, covering 15 states, have ruled the opposite, sanctioning markups without limit within their jurisdictions.

The net effect of this split in the appellate courts is to strip home buyers and refinancers in those 15 states of any federal legal protections against gouging on settlement sheets. Consumers in nine other states are specifically protected against markups, while the rest of the country is in legal limbo, with HUD banning markups but lenders and title agencies under no specific court mandate to obey.

Here's the state-by-state division at the moment:

- Unlimited markups are allowed in Illinois, Iowa, Wisconsin, Indiana, Minnesota, Missouri, Nebraska, Arkansas, Maryland, Virginia, West Virginia and North and South Carolina. No matter how little your mortgage company paid for documents, tax services, appraisals, messenger services, etc., it is free to charge whatever it wants.

- No markups are allowed in Florida, Georgia, Alabama, New York, Connecticut, Vermont, Pennsylvania, New Jersey and Delaware. Residents can sue lenders and other service providers for markups and expect to prevail in the courts, based on appellate court decisions covering their jurisdictions.

- If you don't live in or plan to buy property in any of the states named above, you are in a legal limbo-land when it comes to markups. HUD says its rules prevail and you cannot have fees marked up by a lender or title agency unless additional services are rendered to justify the extra costs. But no cases have been decided by the highest federal court in your area, and therefore neither you nor your loan and settlement service providers know whether markups are legal.

The latest case, handed down Aug. 4 by the U.S. Court of Appeals for the 3rd Circuit (Santiago vs. GMAC Mortgage Group Inc.), involved a class-action suit against GMAC, one of the country's highest-volume home lenders. A GMAC Mortgage customer alleged that the company marked up various fees in connection with the closing of his loan, and thereby violated HUD's ban.

Citing earlier federal appellate court rulings that HUD lacked statutory authority to ban markups, GMAC asked the district court to throw out the class action -- and it did. The home buyers then took the case to the appellate level, where HUD's position on markups was affirmed. Neither GMAC nor HUD had immediate comments on the decision.

Because the appeals court sent the case back to the district court for a possible trial, GMAC could choose to fight it out there. Or it could appeal directly to the U.S. Supreme Court, thereby opening the door to a final, national answer. With a 3-3 division among federal appellate courts -- effectively forcing citizens to be treated differently under the law based on where they live -- the high court would be likely to accept a case to resolve the issue once and for all.

But unless GMAC takes its case to the Supreme Court, the issue will continue to sizzle, costing unsuspecting consumers needless extra expenses at the very moment their finances may be stretched to the max.